Dilatory tactics and the courts’ readiness to safeguard arbitration through cost sanctions

October 2014 | SPECIAL REPORT: INTERNATIONAL DISPUTE RESOLUTION

Financier Worldwide Magazine

October 2014 Issue

It is not unusual for parties to seek to involve the courts in disputes that are ostensibly subject to arbitration as a dilatory tactic. Such legal manoeuvrings, including bringing court proceedings in contravention of an agreement to arbitrate or challenging arbitral awards, undermine the integrity and finality of the arbitral process. Many of the leading arbitration jurisdictions have in place strong policies that support arbitration and the enforcement of arbitration agreements. In the same vein, there now appears to be a growing trend for courts to sanction unmeritorious applications for court intervention through cost orders.

In this article the co-authors report on recent developments concerning this apparent willingness to grant indemnity costs for proceedings commenced in breach of an arbitration agreement and unsuccessful challenges against arbitral awards.

Sanctions for dilatory tactics at the outset of the arbitration

Under Article II(3) of the New York Convention 1958 and equivalent provisions in its signatories’ respective implementing legislation, a court seized with a dispute that is subject to an arbitration agreement must stay the court proceedings before it and refer the parties to arbitration, unless the arbitration agreement is null and void, inoperative and incapable of being performed. Absent such support for agreements to arbitrate, they would prove to be worth little more than the paper they are written on. However, this additional step of seeking an order to stay proceedings, or an anti-suit injunction, not only delays resolution of the dispute but also increases the parties’ costs. Such costs, in most jurisdictions, will prove substantial.

Most common law jurisdictions, aside from the US, follow the so-called English Rule of costs, in that the losing party pays the successful party’s reasonable costs of the proceedings. Unless there has been an abuse of process or something ‘out of the norm’, such costs will normally be assessed on a standard basis. In practice, this means that a successful party will not recover its costs in full, but will have to bear a proportion of those costs. Accordingly, a party seeking to compel a party to stand by the terms of a binding agreement to arbitrate could end up significantly out of pocket even before the arbitral proceedings have begun. However, courts in a number of common law jurisdictions (including England, Australia and Singapore) have held that a party that has suffered damage due to breach of an arbitration agreement should be entitled to its legal costs on an indemnity basis.

The keystone case is A v B ([2007] EWHC 54), in which the English court held that where a party has successfully obtained an anti-suit injunction or a stay of court proceedings as a remedy for a breach of an arbitration agreement, and provided that that party demonstrates that the breach caused it to reasonably incur legal costs, such costs should normally be recoverable on an indemnity basis. The alternative, if those costs were assessed on a standard basis, would mean that the successful party would be unable to recover part of the losses resulting from the breach. That unrecoverable portion of costs would either be lost or would have to be recovered through separate proceedings, a situation which the court considered would give rise to injustice.

In the recent case of Pipeline Services Wa Pty Ltd v ATCO Gas Australia Pty Ltd ([2014] WASC 10 (S)), the Supreme Court of Western Australia adopted this line of reasoning, and ordered that the costs of the party successful in obtaining a stay of court proceedings commenced in breach of an arbitration agreement be assessed on an indemnity basis. In its decision, rendered on 7 May 2014, the court ruled that nothing in the circumstances of the case warranted a departure from the position that a party that obtains a stay of proceedings brought in breach of an arbitration agreement should recover its costs. The court criticised the conduct of the party opposing the stay, which included running every conceivable argument, some of which the Court damningly called “redolent of desperation”.

The English court’s approach has also been adopted by the courts in Singapore. In the case of Tjong Very Sumito and Others v. Antig Investments Pte Ltd (CA 171/2008, Suit 348/2008), the Singapore Court of Appeal heard an appeal against an order granting a stay of proceedings arising out of a share purchase agreement containing an arbitration clause. The lower court had endorsed the English court’s decision in A v B and granted the stay with indemnity costs to be paid to the successful party. The Court of Appeal upheld that decision, found the appeal to be entirely unmeritorious and dismissed it, again with indemnity costs.

Sanctions for dilatory tactics after the conclusion of the arbitration

National arbitration legislation and arbitration rules generally provide that awards made pursuant to an arbitration agreement are final and binding on the parties, and parties usually undertake to carry out any such award immediately and without delay. This finality of arbitral awards is one of the central tenets of arbitration, and what makes it a viable alternative to litigation. This does not limit the parties’ right to bring court proceedings to challenge an award, and applications to annul awards are frequently made. It seems, however, that the courts have had enough, and in the last few years there has been a string of cases where common law courts have sanctioned parties for bringing frivolous, and in some circumstances merely unsuccessful, challenges.

On 15 July 2014, the English High Court dismissed a challenge against an award rendered in four consolidated LCIA arbitrations and ordered that the successful party’s costs be assessed on an indemnity basis (subject to submissions on this issue) (Konkola Copper Mines v U&M Mining Zambia Ltd, [2014] EWHC 2374). The court commented on the high proportion of unfounded challenges, suggesting that costs sanctions would deter parties from making frivolous challenges. In the court’s view, such a sanction was justified in this case as it was sufficiently “out of the norm”. Like its earlier decision in the case of Exfin Shipping (India) Ltd Mumbai v Tolani Shipping Co Ltd Mumbai ([2006] EWHC (Comm)) rendered in 2006, the English High Court still appears to predicate an order for indemnity costs upon either some form of abuse of process or an apparent lack of merits of the challenge in question.

Hong Kong courts have gone further. In the landmark decision of A v R ([2009] HKCFI 342), which closely followed the Civil Justice Reforms, the Hong Kong Court of First Instance ruled that in the absence of special circumstances, as a matter of principle indemnity costs will normally be appropriate in unsuccessful challenges to an award. The court reasoned that parties have an obligation to comply with arbitral awards, and thus are entitled to expect the court will enforce such awards as matter of course. Applications for annulment of or for resisting enforcement of an award should therefore be exceptional events. If such an application is unsuccessful the winning party should not have to bear the costs of defending it. Instead, the losing party should bear the full consequences of its unsuccessful challenge. Anything else would be inconsistent with promoting the just, cost-effective and efficient resolution of disputes, and could encourage unmeritorious challenges.

The Hong Kong approach has not yet been considered in England. However, in Australia it has been considered and rejected. In a 2011 case concerning the enforcement of an arbitral award rendered in Mongolia, the Victorian Court of Appeal rejected the view that indemnity costs should be automatic (IMC Aviation Solutions Pty. Ltd. v Altain Khuder LLC, Case No. S APCI 2011 0017). It held that that resisting the enforcement of an arbitral award – albeit unsuccessfully – is not a special circumstance which warrants imposition of indemnity costs.

Other jurisdictions are also taking a stricter approach to dilatory challenges to arbitral awards. In the United States, courts will generally only depart from the so-called American Rule on attorney fees (which provides that the parties to litigation pay their own legal fees regardless of the outcome) in special circumstances, including vexatious motions. However, courts have been seen to impose costs sanctions against parties, and also against their legal counsel personally, for bringing unmeritorious challenges to arbitral awards.

In the case of Digitelcom, Ltd. v. Tele2 Sverige AB (12 Civ. 3082), following the dismissal of a party’s challenge to an arbitral award, the US District Court of the Southern District of New York found that the petition to vacate the award had caused “unnecessary expense” and awarded the successful party’s to recover attorney’s fee costs, pursuant to 28 U.S.C. section 1927. That provision renders attorneys who multiply the proceedings unreasonably and vexatiously personally liable for the excess costs, expenses and fees reasonably incurred because of such conduct. The court reasoned that where parties agree to arbitration as an efficient and lower-cost alternative to litigation, both the parties and the system have a strong interest in the finality of the arbitration award. It went on to say that although sanctions should not be imposed lightly, and should not chill good-faith challenges to awards, “litigants must be discouraged from defeating the purpose of arbitration by bringing such petitions based on nothing more than dissatisfaction with the tribunal’s conclusions”. For that reason, it said, sanctions are “peculiarly appropriate in the context of a challenge to an arbitral award which appears to be a largely dilatory effort”.

Conclusion

The costs of enforcing agreements to arbitrate and arbitral awards can be substantial. With jurisdictional competition for legal business ever increasing, it is unsurprising that the courts are looking to ensure that not only are their policies robust enough to protect arbitration and the finality of awards, but that they also allow for recovery of legal costs. Parties considering bringing proceedings in breach of an arbitration agreement or challenging an award should bear in mind that in today’s judicial climate there is a significant risk that they will face sanctions in costs in the event they are unsuccessful.

Claire Morel de Westgaver, Cara Dowling and Henry Ng are associates at Bryan Cave. Ms Morel de Westgaver can be contacted on +44 (0)20 3207 1253 or by email: claire.morel@bryancave.com. Ms Dowling can be contacted on +44 (0)20 3207 1208 or by email: cara.dowling@bryancave.com. Mr Ng can be contacted on +65 6403 6386 or by email: henry.ng@bryancave.com.